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Ecolab (ECL)

Ecolab sells a wide range of sanitizers, cleaners, lubricants, cleaning systems, dispensers, water treatment products, and on-site services that are used by customers in virtually every industry (e.g. restaurants, hotels, hospitals, laundromats, manufacturing plants, oil wells, etc.) to keep their food safe, maintain clean environments, and optimize water and energy use.

To give you an idea of Ecolab’s scope of business, during 2016 the company helped customers wash more than 31 billion hands, process 42% of the world’s total milk, clean 113 million loads of linen, ensure the safety of 27% of the world’s processed food, and manage 1.1 trillion gallons of water. Overall, Ecolab is in more than 1 million customer locations in over 170 countries around the world.

Acquisitions have played a meaningful role in the company’s evolution in recent years. The company merged with Nalco in 2011 in an $8 billion deal to become the global leader in water, hygiene, and energy technologies and services. This deal increased the company’s exposure to industrial markets, which are big users of water treatment products, and helped Ecolab serve customers more comprehensively.

In 2013, Ecolab acquired Champion Technologies for $2 billion to significantly enhance its position in the upstream energy services market. The company also acquired Anios, a European healthcare and hygiene business, for $800 million in 2017.

By geography, Ecolab generated 58% of its 2016 revenue in North America, 23% in Europe, Middle East and Africa, 13% in Asia Pacific, and 6% in Latin America. The company has been expanding its footprint in emerging economies such as China and India, which have a higher growth potential compared to mature markets like the U.S.

Segments
Global Industrial (36% of 2016 sales): provides water treatment and process applications, and cleaning and sanitizing solutions primarily to large customers within the manufacturing, food and beverage processing, chemical, mining and primary metals, power generation, pulp and paper and commercial laundry industries.

Global Institutional (35% of sales): provides specialized cleaning and sanitizing products to the foodservice, hospitality, lodging, healthcare, government, education, and retail industries.

Global Energy (23% of sales): serves the process chemical and water treatment needs of the global petroleum and petrochemical industries in both upstream and downstream applications. The biggest piece of the business is oil fuel chemicals that treat reservoirs (e.g. kill bacteria, prevent corrosion, clean water).

Other (6% of sales): provides pest elimination and kitchen equipment repair and maintenance.

Business Analysis

Ecolab is a unique business. The company has a large portfolio of valuable and protected technologies (over 7,700 patents) that allow it to sell its solutions at 10-20% price premiums compared to competitors’ offerings.

While the initial cost is higher, the savings that these products deliver over time (e.g. less waste, more energy efficient, more reliable) actually make their total cost of ownership less.

However, Ecolab’s main competitive advantages are its dependable service quality and people. The company focuses on continuous customer-centric innovation and personalized service. At the end of the day, Ecolab is selling service and consistency (e.g. food needs to be kept safe, water needs to be kept clean, etc.).

Ecolab carries out its value proposition with its 48,000 employees, and over 25,000 of its staff are in customer-facing roles.

These employees visit more than a million customer sites in more than 170 countries each year to provide service. These frequent touchpoints reinforce the value of Ecolab’s unique products and systems being used by the customer.

On-site visits also enable additional growth opportunities for the company. More specifically, Ecolab’s service-driven business model allows it to pursue a unique growth strategy that it calls, “Circle the Customer – Circle the Globe.”

Essentially, Ecolab realizes that its customers are spending about $6 on addressable products for every $1 they spend with Ecolab (the company’s addressable market is $100 billion in size and highly fragmented; Ecolab is the largest player with less than 15% market share).

Once Ecolab establishes a relationship with a customer, it works to introduce new products and solutions from all of its business segments. For example, Ecolab might first win business with a restaurant with its dishwashing technology.

From there, the company can try to sell products needed to clean the restaurant, help with water filtration, eliminate pests, keep food safe, repair kitchen equipment, and much more. Hotels are similar – their food services are very similar to a restaurant, and they have substantial room cleaning and laundry operations that can all use Ecolab’s products.

With such a large service network in place, Ecolab is able to develop or acquire new products that can be scaled across its global operations or cross-sold into related markets very efficiently. During 2016, for example, Ecolab acquired the assets of UltraClenz, a developer of electronic hand hygiene compliance monitoring systems and dispensers, and Laboratoires Anios, a leading European healthcare and hygiene business.

As the largest player in the market, Ecolab also benefits because the largest customers in the market require a supplier that can meet their needs on a national or global level; they do not want to work with 100+ suppliers and systems around the world.

Ecolab is uniquely positioned to handle their scale and complexity thanks to its breadth of products and global service team. As those big customers grow their businesses and expand into new regions, Ecolab grows with them.

The very nature of Ecolab’s products further adds to the strength of its business model. Over 90% of Ecolab’s business is a recurring revenue stream (e.g. customers consume Ecolab’s sanitizers and need to reorder).

While this provides reliable cash flow and stable operating margins, it also results in sticky customer relationships that often last for decades.

With cleaning and sanitizing products representing a small cost of the customer’s overall operations, Ecolab should retain the business as long as they don’t screw anything up.

While Amazon (AMZN) is disrupting many industries, Ecolab seems likely to remain insulated from this risk because its employees build such strong relationships with customers and gather information critical to serving their needs better through on-site visits.

Simply put, Ecolab has benefitted from consistent product innovation, ongoing cost efficiency, and leadership positions in the huge global markets for food, water, energy and healthcare, which provide plenty of long-term growth potential.

In fact, the company estimates that the world will require 40% more water, 35% more food, and 30% more energy by 2030, and Ecolab’s solutions will almost certainly play a major role in helping the planet get there in an efficient manner.

Key Risks

Soft economies, challenging end markets, and currency headwinds are usually the biggest short-term concerns for huge global companies like Ecolab. For example, the company derives close to 50% of its revenues from international markets, which have been volatile in recent years thanks to falling oil prices and geopolitical issues.

Ecolab has also been on a shopping spree, which brings about its own company-specific risks. 

For example, Ecolab has made at least one acquisition almost every year in the last decade, and the large acquisitions of Nalco and Champion resulted in a significant accumulation of debt on the company's balance sheet. Ecolab has used much of its cash for servicing its debt rather than paying significantly higher dividends to its shareholders, and it needs these deals to play out as expected.

With acquisitions come the issues of integration and accounting for new variables that might not have mattered much to Ecolab in the past.

Ecolab’s acquisitions of Nalco (2011 - $8 billion) and Champion Technologies (2013 - $2 billion) meaningfully altered the company’s mix, for example. More specifically, they increased the company’s exposure to industrial production and energy markets, perhaps adding some volatility to an otherwise stable business model.

However, even if Ecolab’s business is somewhat more volatile than it was in the past, the company is still extremely durable. Ecolab is well diversified by product, geography, customer, and technology, and about 90% of its sales are also recurring revenue streams in the form of consumable products (e.g. soaps, chemicals). Ecolab is likely here to stay for many years to come.

Closing Thoughts on Ecolab

Ecolab appears to be a wonderful business with a bright future. The company’s massive service network, breadth of products, strong technology portfolio, large recurring revenue base, and long-lasting customer relationships will likely serve it well for many years to come.

Ecolab is a dividend aristocrat that has raised its payout each year since 1986, and it appears to be one of the fundamentally safest companies to bet on for continued dividend growth going forward. 

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